Credit Risk Management Best Practices (6 Proven Strategies)

Salespersons are often in a hurry to onboard customers faster to achieve their targets. They often pressure the finance teams to extend credit without sufficient due diligence. But extending credit without assessing the creditworthiness of the customer is risky. Conducting business with a new customer with no credit history or poor ratings can lead to higher bad debts. Hence, credit risk management best practices need to be in place for risk assessment.

Credit risk management is an ongoing assessment process that protects your business against late or non-payments and improves your financial health. Credit risk management best practices help to maintain cash flow and elevate the efficiency of your business. Here are some crucial factors that you should consider for credit assessment and scoring:

• Financial health
• Payment history
• Business stability
• Industry risks
• Business news

Effective credit risk management practices vary from business to business. It involves identifying customers who default on payments frequently and developing a dynamic strategy to mitigate credit risk. Here are the six most efficient credit risk management best practices you need to know in 2022:

Provide online credit application forms



Introduce online credit application forms to make customer onboarding smooth and faster. Make all the essential sections mandatory to avoid missing out on any critical information. 

An online application makes it easier to gather and store data. Accurate and complete customer information makes your credit risk analysis process more robust. Your credit application must collect the following data:

• Company information
• Bank information
• Commercial trade information
• Provisions in the event of non-payment
• The maximum time required to report a quality/quantity issue
• Terms of payment
• Description of how disputes would be resolved
• Your rights to end credit terms
• Data verification

Analyze and predict credit risk



You must consider two factors before you extend credit to your customer. First is the creditworthiness of the customer, and the second is the impact on your cash flow if the customer goes delinquent. Before customer onboarding, review their payment history from financial institutions and sources such as:

• Credit bureaus like D&B, Experian
• Credit groups like NACM
• Banks
• Public financials (such as  income statements, balance sheets, financial ratios, etc.)
• Other sources such as personal guarantees or trade reference

Current and historical data available on these sources help improve your credit scoring accuracy. It also lets you identify the creditworthiness and the potential risk posed by any new customers. This approach helps create a strong functional structure for credit risk management and decision-making.

Real-time credit risk monitoring 



Source: PYMNTS

Credit risk management is a continuous process. In this constantly changing business environment, periodic review of existing customers is essential. 

Real-time credit risk monitoring keeps you updated about all the risks and opportunities. It helps to identify and mitigate credit risk before it becomes a problem. For example, if an existing customer is growing and they have strong financials, you might want to consider increasing their credit limit to expand trade with them. But, if an existing customer makes late payments to other vendors and shows signs of delinquency, you might want to reach out to that customer and collect your payment or modify payment terms at the earliest. 

Signing up with solutions like RadiusOne Credit Risk Application is an efficient way to monitor risk in real-time. Such solutions integrate easily with credit agencies and send alerts to credit risk management teams directly. These solutions alert you in case of:

• An improvement in credit score
• A decline in credit score
• Bankruptcy
• Recent legal judgments
• Relocation of business
• Change in the management

Establish and follow a credit policy 



A credit policy protects your business from financial risks and defaulting customers. A well-defined credit policy allows you to make credit decisions quickly and set payment terms. You must periodically review and update your credit policy to ensure it meets changing market conditions and standards. To avoid disagreements on credit limits between internal teams, clearly define workflows and the person or team responsible to approve credit limits. To make an effective credit policy, you must clearly document and communicate the following:

• The mission of the credit team 
• Goals of the organization
• Roles and responsibilities of team members
• Credit evaluation process 
• Collection process 
• Terms of sale 

Use clear communication for payment terms and conditions  



 Communicating payment terms to customers clearly and on time is crucial to avoid late payments and ensure healthy customer relationships. Here are some extra tips to help you improve customer communications for better credit risk management:

• Establish precise payment terms
• Clarify interest rates and taxes
• Specify due dates and late payment penalties
• Include conditions for closing the credit limit
• Specify clauses for dispute management

Leverage automation for fast and accurate credit risk management 



Source: PYMNTS

Mid-market organizations are increasingly adopting accounts receivable automation solutions to keep pace with their growing clientele and to minimize credit risk. Automation enables real-time credit management, lowers credit risk, and reduces bad debts. Accounts receivable automation supports:

• Accurate credit decision-making
• Automated periodic reviews
• Faster customer onboarding
• Bank and trade reference validation
• Real-time credit risk alerts
• Alert triggered credit reviews